What are disadvantage and advantages of Corporate bonds?

Answer 1

Advantages of corporate bonds are as follows:

They are provide a fixed stream of income so they are safer than stocks. Also, bond holders get paid by companies before stock holders. For example, companies are required to make interest payments to bondholders, but are not required to make dividend payments to stock holders. Another example of this is that if the company went bankrupt, the bond holders would be the ones to get the proceeds from auctioning off the company's assets and the stock holders would get nothing. Another advantage of corporate bonds over government bonds is that they provide higher interest.
The reason for this is because interest rates are made up of a few ingredients. First is the real interest rate (the actual money you are receiving simply for loaning money), then the inflation premium (bonds have to pay extra interest so that bond holders don't have the value of their payments decline due to inflation), then is the liquidity premium (this is extra interest bond issuers have to pay if their bond is not easily bought and sold. government bonds have virtually no liquidity premium because they are bought and sold constantly, but corporate bonds will have some liquidity premium because they are not traded as heavily as government bonds, next is the default risk premium (this is extra interest paid by corporations to compensate bondholders for the risk of lending to a company that could potentially go broke), and lastly is the maturity risk premium (extra interest paid to compensate long-term bondholders for assuming the risk of seeing the market rate of interest change over the life of the bond).
Now that we have that established we can understand why corporate bonds offer higher interest than government bonds or municipal bonds. Let's start from the beginning, corporate bonds and government bonds are both subject to inflation (except government indexed bonds which are adjusted for inflation) so they have the same inflation premium. Now we get to the liquidity premium, and here is where they first differ. Corporate bonds have to offer a higher interest rate than gov. bonds because they are nowhere nearl as heavily traded as government bonds so it's much harder to buy and sell a corporate bond without losing any value. Next is the default risk premium. This is where the biggest difference is. U.S. government bonds are considered to be the safest investments in the world. There is basically no risk that the U.S. government will default on its loans. Therefore, government bonds have no default risk premium. On the other hand, corporations can and do go bankrupt. Because of this risk, corporate bonds have to offer higher interest than government bonds to compensate lenders for assuming this extra risk. Furthermore, some corporations are more likely to go bankrupt than others. Firms like Standard and Poor's or Moody's give companies debt ratings so you can see how safe or risky that company's bonds are. A grade of AAA or Aaa is the safest corporation while anything below Baa is usually considered to be "junk" which is just a way of saying high-risk but also high-interest bonds. The last aspect of interest rates, the maturity risk premium, varies based on the time to maturity of the bond but does not vary between government bonds and corporate bonds. So, in summation, corporate bonds offer higher interest because they have to offer investors compensation for liquidity risk and default risk.

Disadvantages of Corporate Bonds:
The disadvantages of corporate bonds are basically the same as the advantages but from a different point of view. As I said earlier, bonds are considered safer than stocks because they offer a steady flow of income while there is no guaranteed income from a stock. However, stocks offer greater potential returns if its price increases. So in this way, bonds and stocks obey a fundamental rule of economics: with greater risk there is greater reward. So in periods of slow economic growth, bonds may look more attractive because it is unlikely stocks will provide good returns. In a period of expansion, however, stocks look much more attractive than bonds because you could make a lot more in much less time if your stocks go up. Another disadvantage of coporate bonds over government bonds is that corporate bonds have more risk. While this does offer a higher yield in return, if you are risk averse, you would view this as a disadvantage of corporate bonds.

Answer 2

Corporate Bonds Advantages And Disadvantages

Answer 3

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Bonds are safe if you invest in government bonds or solid corporate bonds. If you shop around you can get a good fixed rate of return. You are guaranteed to get your principle back in full on a fixed maturity date assuming that the company does not go bankrupt. However if there is big inflation you will be stuck with what may turn out to be a bad rate of return. Also bonds unlike common stock can never go up in value if the company does well or the economy improves. If you invest in long term bonds they will lose market value during the time between date of purchase and maturity date if interest rates go up. That's why generally people that buy bonds buy them with the intent to hold them until maturity.

Answer 4

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What are disadvantage and advantages of Corporate bonds?

Answer 5

Advantages
They pay a set amount of interest for a set amount of time
They return all your money when they mature
If the company goes out of business, bondholders are paid off before stockholders.

Disadvantages (when you compare them to stocks)
No growth potential (unless they are covertible bonds)
No inflation hedge
Much higher returns can be achieved from stocks
Less liquid than stocks (less chance of selling the bond at a price close to a recent selling price)
When interest rates go up, bonds drop in price

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Answer 6

You would be investing in a fixed income vehicle. If rates go up what you can sell for would go down, if rates went down you would be able to sell for more. You have to be aware ofthe interest rate curve so that you are not investing a bond that is too long for the current interest rate market. Like with any bond you have to be aware of the rating of the company selling it, a AAA rated company is safer than an BBB company and you would get less interest from the AAA company because the rating is better.

Answer 7

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Answer 8

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Answer 9

answer to both is interest rates. They go up - dis. they go down - adv. Just an income vehicle that you can trade for capital gain (or loss) on top of the income. Have to watch credit ratings of the corp as well.

Answer 10

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